Why We Regulate -- and Why John Walsh Needs to Resign

Regulatory agencies exist to protect the public, not the corporations they regulate. The head of the Office of Comptroller of the Currency doesn't seem to understand that. But that's not why John Walsh needs to resign.

The OCC was created to stabilize the economy, make it easier to conduct trade, and protect people's savings. It didn't do that. In fact, it ignored the warnings raised by others. But that's not why John Walsh needs to resign.

His agency failed to anticipate the foreclosure crisis, and it overlooked bank criminality. Later John Walsh misled a Senate panel -- and the general public -- about the size of the problem. And even after being forced to clarify those misleading statements, Mr. Walsh keeps on repeating them. Whether by intent or ineptitude, he continues to misinform the public.

And that's why John Walsh needs to resign.

The Interview

John Walsh keeps using deceptive language in order to minimize bank fraud. This week he told the Financial Times that there were "a small number of cases where we felt there should have been a stop" to foreclosures. A "small number" -- that's the same phrase he used in testifying before a Senate panel. Under pressure, he eventually conceded that there were probably "tens of thousands" of them, even by his own limited definition. But he didn't explain that to the readers of the Financial Times when he used the same misleading phrase again.

Walsh also says that the problem of bank foreclosure fraud "came to light at the end of September... through some court proceedings." That's completely false. Court filings on the topic have been public since 2009. (See US Bank vs. Ibanez, etc.) What's more, eagle-eyed observers had been finding evidence of fraudulent foreclosure activity as far back as 2003 (we'll make some more information available on that score shortly).

Walsh's video interview is a slow-motion train wreck. He compares bank criminality to speeding -- "as with speeding, if there's a violation of law there will be penalties." He announces unspecified penalties, but promises they'll be less severe "if we find that not a lot of homeowners were injured" -- which is exactly the "finding" he's been jury-rigging the numbers in order to achieve. ( He also says that "subprime underwriting that was done within the national banks was done properly." Interesting.)

Walsh makes it clear that he's more interested in closing this case than he is in justice, or in preventing future crimes. We need to "complete the process," he says, to "draw a line and get the industry to move on."

People talk of "regulatory capture," that process where an agency becomes a servant of the industry it regulates. John Walsh is the Patty Hearst, the "Tania," of regulatory capture. Yves Smith has more information on the OCC and Walsh, and asks: "What do we call the OCC? The Office of Capital Corruption? The Office of Criminal Capitulation?" Before we change its name, though, let's change its leader.

How did it come to this?

Wildcat Banks and Dollars in Every Color

Regulators exist to protect the public, and John Walsh's agency, the Office of the Comptroller of the Currency, exists to ensure that we have an honest and reliable currency and banking system. Back in the nineteenth century, "wildcat banks" were springing up everywhere, issuing unreliable dollars that other banks often didn't recognize at full value. Some estimates say that by 1860 there may have been as many as 10,000 different bank notes in circulation.

The federal government needed to stabilize the nation's finances and establish a reliable national currency. (It needed to borrow money for the Civil War, too.) So it issued green dollars ("greenbacks"), and gave them its full guarantee. The OCC was formed to make sure that banks were reliable and were handling the new currency properly. A dollar needed to be worth a dollar everywhere. (Some Libertarians want to go back to multiple currencies, but that's a topic for another day.)

In a way, the OCC made the Sears catalog possible -- and it helped make a national economy possible, too. It wasn't formed "of the banks, by the banks, and for the banks." The OCC was created to protect people's savings, and to encourage commerce.

Enter John Walsh

John Walsh became the OCC's chief of staff in 2005, the same year that the OCC issued a regulation prohibiting states from regulating national banks. That regulation was finally overthrown by the Supreme Court in 2009, but the OCC tied the states' hands as the system collapsed. Mr. Walsh joined the OCC when John Dugan, a former bank lobbyist and political apparatchik, was in charge. (Dugan consistently made statements that served his industry's interests rather than the public's and displayed an appalling ignorance of his business -- or hoped for it from his listeners). Walsh became acting head when Dugan's term ended in 2010, and he's been there ever since.

Walsh's OCC recently took control of the Office of Thrift Supervision, too, and the OTC's recent history of disgrace and failure was thoroughly documented in the Levin/Coburn Report on the financial crisis.

There were two important priorities for the head of the OCC when Mr. Walsh took the job: restore the public trust and confidence shattered by his predecessor, and ensure that similar regulatory breakdowns could never happen again. Walsh has failed at both assignments.

America's Least Wanted: Covering Up

Of course, he's not that John Walsh, the America's Most Wanted guy. Unlike his namesake, this John Walsh doesn't seem to want to catch wrongdoers. Instead of pursuing criminals and exposing them to public scrutiny, this John Walsh exposed his agency to public embarrassment by attempting to do the opposite.

Mr. Walsh told a Senate panel that "our work identified a small number of foreclosure sales that should not have proceeded [emphasis mine]." But his "small number" comment was only put in context afterwards, through an OCC spokesman who explained when pressed that the agency had only examined 2,800 foreclosures. That's less than three-tenth of one percent of the foreclosures underway at the time. So how could it have found a large number?

Walsh later conceded that the actual number of wrongful foreclosures might be "in the tens of thousands." And even that number's artificially small, since Walsh insists on a narrow and unreasonable definition of wrongful bank behavior. As Reuters thoroughly documented, both Walsh's methods and his statements were suspect. Since his testimony was widely reported, but the clarifications were not, Walsh managed to leave a permanently misleading impression with the American public.

The Sales Pitch

Said Walsh: "If there is any reassurance here, and there is sadly very little, it is that borrowers subject to foreclosure in our sample were indeed seriously delinquent." But why were they delinquent? In many cases people fell behind on their loans because predatory banks and loan servicers hit them with unfair, undeserved fines and additional fees. Sometimes lenders forced a loan into delinquency with fraudulent fees, then justified a foreclosure because the borrower was behind on payments. Walsh has made this cynical industry argument his own.

Walsh comes across like a smooth salesman for the banks and mortgage companies he's supposed to regulate. As his video interview with the Financial Times demonstrates, Walsh even uses the industry's slick phraseology ("improper" instead of "illegal," for example) to describe massive, systematic, serial fraud by banks and loan servicers. Even Financial Times reporter Tom Braithwaite succumbs, describing thousands of fraudulent documents with the industry-honed phrase "shoddy paperwork."

Walsh has also suggested that $20 billion would be an unfairly high amount to levy on the banks, given the scale of their wrongdoing. Actually, it's extraordinarily low. We've laid out our argument in more detail elsewhere, but the U.S. housing market has lost ten trillion dollars in value -- and homeowners have been left holding the bag. Homeowners didn't choose the appraisers, write the loan contracts, or hire PR firms to convince the public that homes were a fail-safe investment. Yet homeowners, not banks, are paying the price.

Time to resign

John Walsh doesn't seem to understand his agency's mission. His organization missed the warning signs for the last crisis, and now he's papering over a pattern of criminality by the institutions he supervises. He's "back-dating" foreclosure fraud, claiming it only surfaced last September. That's either because he intended to mislead his audience, or because he lacks a fundamental understanding of the most urgent matter before his agency.

He used slippery language to persuade some senators that only a "small number" of foreclosures were improper, was forced to concede it was a misleading statement, and then used the same language again. He either did that despite the fact that it misled people once before, or because it misled people once before.

Whatever his reasons, it's time for John Walsh to resign.